While biotech has been the clear market leader recently, there is another leading sector that is flying under the radar. Defense stocks have quietly outperformed the market since summer, and corrective pauses for many appear ready to resolve to the upside.

When we talk about defense, the first thing most investors think of is aerospace and high-tech communications. However, there is a member of the group that serves the military in a different capacity. Huntington Ingalls Industries (NYSE: HII) builds and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard.

The stock has been a top performer with a 60%-plus gain since August and a nearly 30% gain year to date. Compare that with the S&P 500’s 2.6% gain in 2015.

Normally, I am less enthusiastic about chasing top performers after they have already had big gains. For example, many biotech stocks are soaring at ever increasing speeds. The sector is overbought, which is not necessarily bad, but no stock moves straight up forever, and corrections could be severe.

So when I find a strong stock in a strong sector that is already in the midst of an orderly correction, my interest is piqued. HII has been moving sideways since mid-February, and based on the pattern’s position following a steep rally, it looks like shares are forming a high, tight flag.

A flag pattern is a flat or countertrend move that follows a rally and is named for its appearance of a flag flying on a flag pole. Volume contracts as bulls take profits, but bears still aren’t willing to sell. Basically, the stock is digesting its gains.

#-ad_banner-#Beneath the surface, demand continues to build. I use a study called on-balance, or cumulative, volume as a proxy for demand. On-balance volume keeps a running tab of volume changing hands on up days minus volume on down days. The theory is that when the bulls are more aggressive than the bears, on-balance volume moves higher.

Most of the time, on-balance volume tracks stock prices. When the two diverge, even when one or the other is merely flat, we can find interesting trading opportunities. And that is what we see with HII. While the price of shares has been flat, its on-balance volume has been rising. That’s a bullish sign.

The buy signal came Friday when prices moved above the upper border of the flag near $142.

Normally, we can forecast upside targets based on the size of the patterns that form. In this case, the flag height at its widest point is roughly $7.50. Adding that value to the breakout point gives us a $149.50 minimum target, which is 5% above current prices.

However, based on the strength of the rally since it began and the breadth within the sector, it is hard to think the gain will be contained to such a small percentage. Measured targets such as these often fall at integral multiples of the height of the pattern that was just broken. This is why I believe it will double that gain to reach $157.

My colleague, Tom Vician, is also bullish on Huntington. A little-known indicator called the Alpha Score issued a buy signal for HII back in November. Since then, shares are up more than 30%. Tom also thinks HII has more upside based on its 184 (out of 200) Alpha Score, one of the highest scores in market right now. You can learn more about the Alpha Score here and get the names of 10 other stocks currently signaling “buy” right now.

Based on both the fundamental and technical outlook, HII should be considered an excellent trading opportunity.

Recommended Trade Setup:

— Buy HII at the market price
— Set stop-loss at $136.50
— Set initial price target at $157 for a potential 10% gain in six weeks

This article was originally published on ProfitableTrading.com: Flag Breakout Signals This Defense Stock is an Immediate ‘Buy’